Business

How Amazon Brought Publishing to Its Knees — and Why Authors Might Be Next

Amazon 's tension with book publishers grew out of a reliance on the ecommerce retailer's innovations like the Kindle.

By Jason Abbruzzese & Katie Nelson2014-07-30 11:00:20 UTC

Morgan Entrekin is happy with the relationships he's developed with Amazon. As the president of independent publisher Grove/Atlantic Books, he witnessed the industry change as Amazon’s introduction of the Kindle helped publishers like him embrace the digital revolution that has battered other industries.

It's the future that he's worried about.

“Right now [Amazon] is allowing me a perfectly fair margin, but what happens when they have total control or twice as much of the market share than they have now?” he said.

Entrekin's sentiment isn't unusual. Amazon's skirmishes with various publishers had been obscure to most until May, when the ecommerce giant began to block preorders of upcoming Hachette books. Since then, the dispute has been a public one, especially by Amazon's usually tight-lipped nature.

The relationship between Amazon and publishers started out as mutually beneficial. Amazon brought publishers into the digital age, and publishers were happy to provide the content in return for a new revenue stream.

As e-books grew and brick-and-mortar businesses like Borders struggled, the business dynamics between Amazon and publishers changed. Publishers like Hachette — after being boosted by Amazon's investment and innovation — are now uncomfortably reliant on the ecommerce site and looking for ways to maintain a grip on an evolving industry but finding none.

Amazon now claims just more than two-thirds of the U.S. online book market, according to Codex Group.

With Hachette relying on Amazon far more than Amazon relying on Hachette, industry participants are watching the dispute for clues as to where the book market is headed — and are worried that Amazon's growing self-publishing movement could doom authors to the same fate as publishers.

Amazon declined to comment for this story, and Hachette did not respond to requests for comment.

A brief history of (e-book) time

Unlike other forms of media, book publishing has had a smooth transition into digital.

As other media industries like music and magazine/newspaper publishing suffered from declines, e-books took hold quickly as a revenue source, particularly after Amazon introduced the Kindle in 2007.

Other media segments were not so lucky. The music industry suffered a revenue decline of more than 50% from a high of $14.6 billion in 1999 to $6.3 billion in 2009. Book publishing has not had to endure any such contraction.

"We have to give a tremendous amount of credit to Amazon and Jeff Bezos and his team for the investment that they were willing to make in those years," Entrekin said. "They did it in an orderly manner, in a way you could trust, and it's helped us."

There was a time when e-books were just a small part of the overall market, but now e-books are reaching parity with print. In 2013, some 457 million e-books were sold vs. 557 million hardcovers, according to the Association of American Publishers and the Book Industry Study Group. (Paperbacks were not included in that estimate.)

The sales growth magnifies publishers' unease with the with the $9.99 price point that CEO Jeff Bezos had decided on — a number that had no basis in economics but rather in psychological pricing, according to Brad Stone's defining book on Amazon, The Everything Store. Amazon recently defended that price in a blog post, claiming it is better for consumers, publishers and authors.

The $9.99 e-book introduction came after publishers had already seen the prices of books fall as chain stores like Barnes & Noble and Borders drove out independent sellers through lower pricing.

Publishers accepted that, said David Vandagriff, an attorney who has spent decades representing both authors and publishers, but they never quite cottoned to the $9.99 e-book. That price point continues to cause problems and is believed to be the primary sticking point between Amazon and Hachette.

"The publishers, they had to resign themselves to Barnes & Noble, but they didn't go through that process quite as well or quite as thoroughly with Amazon," he said. "They always thought Amazon was underpricing."

Underpriced or not, publishers had been handed a digital revenue stream without having to make investments or take risks.

Vandagriff noted that many of the major book publishers are units of large European conglomerates, a system that can tend to stifle investment in innovation.

As Amazon innovated, publishers benefited. Instead of each company figuring out how it would change to compete in a digital world, the industry as a whole remained relatively unchanged. Publishers had to do little other than negotiate for cuts of the revenue.

"They are very much focused on financial performance and the numbers, and if the CEO of a subsidiary doesn't make the numbers, that person is going to go. That constrains experimentation on the part of publishers, who are not very experimental in the first place," Vandagriff said.

A tale of two industries

By outsourcing the innovation to Amazon, publishers were subject to its preferences — including that $9.99 price point.

"[Amazon] put downward pressure on prices because Amazon was always trying to lower e-book prices. Publishers were always trying to prevent that from happening because it lowered the perceived value of books," said Arun Sundararajan, a professor at New York University who specializes in digital economics.

“Amazon had market power as a retailer two years ago but they have even more market power now. It changed in magnitude, not in substance,” Sundararajan added.

Meanwhile, smaller and more innovative companies have been stymied, keeping the industry from evolving with the times, said Karen Christensen, founder of Berkshire Publishing.

“Big publishers are dinosaurs who shouldn’t exist anymore, and that’s what the publishing industry amounts to these days," she said. "As a very small, specialized publisher, Amazon is affecting me at least as much as they are affecting the big publishers. It’s companies like mine that could be part of publishing more creative, more innovative, more global. We are being put in a position where we cannot innovate the way we should. We cannot provide some of that healthy disruption in the publishing industry.”

Of price and men

Whether publishers can figure out how to manage a $9.99 price point and Amazon's market dominance may end up being a footnote in history if self-publishing continues to grow.

Authors, attracted by the prospect of keeping 70% of sales as long as they price their books at or below $9.99, have begun to sign up with Amazon, skipping publishers altogether.

It is only a matter of time until this has a serious impact on the balance sheets of the big publishers, Vandagriff said.

“We're at the point now where the publishing houses are being undercut by the river of indie publishing, and at some point in time the front porch is going to drop in the river. At that point maybe they'll have to acknowledge it, but right now they just don't want to,” he said.

Advocates of self-publishing, like author Hugh Howey, argue that the royalty opportunities are too great to pass up, and that publishers will need to transition into a different role to remain relevant.

"I think today’s successful self-publishing groups will become tomorrow’s boutique publishing agents. The advantage of worldwide distribution through e-books and on demand is already outweighing the advantage of being in a bookstore for three to six months," Howey said. "And the financial difference between royalties is so massive that more and more authors are discovering this, which allows for colleagues to discover it. I really think in 10 years, you’re going to see a lot more people self-publishing."

Self-publishing has its success stories, but has also caused concern among many in the industry. The fear is that Amazon could end up doing to independent authors the same thing it has done to publishers — make them reliant on a system and then use its leverage to negotiate relentlessly.

“I definitely do see a lot of novice publishers just coming into the market, a lot of them in self-publishing, who haven’t really taken a holistic view of publishing as a business and who see an easy way to jump into the market through Amazon," said Angela Bole, executive director of the Independent Book Publishers Association. "They set themselves up with relationships and partnerships that aren’t necessarily beneficial to them down the line."

Whether self-publishing takes hold or not, it may be too late for any individual authors not named J.K. Rowling or James Patterson to avoid the power of Amazon.

Brent Weeks, a New York Times bestselling author of fantasy novels published through Hachette, noted that Amazon's importance as a discovery place for books means that authors and publishers have to comply with Amazon's wishes or face obscurity.

"The dispute is hurting me. No matter how much I use my social media and web channels to tell people where they can buy my books, I still get questions from readers who ask when they can pre-order," he said. "The truth is, for many customers, if it's not up on Amazon, then it must not be available at all."

As a result of Amazon's move to block authors (and drastically impact their book sales), an uneasy union between writers and publishers has emerged after years spent fighting each other.

Douglas Preston, a Hachette author who has penned numerous New York Times bestsellers, circulated a letter that has been signed by more than 750 authors. It calls for Amazon to cease blocking authors' new books.

"It seems like authors have really come together in a way that I’ve never seen before on this issue," Preston said.

He added that he respects Amazon's need to pursue its business strategies, but that the company had clearly gone after authors in an attempt to pressure Hachette.

"Our group doesn’t have anything against Amazon at all, we’re just against them hurting authors who have nothing to do with this dispute as a way to try to gain leverage against Hachette. We would like to go back to the way things were," he said. "Look, Amazon and Hachette can duke it out, go ahead, get in the ring. But don’t hurt us. We’re not in the ring with you. We don’t want to be pummeled like this. And it’s not Hachette that’s doing this to us, it’s Amazon."

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